Tax Debt

There are many ads on the TV and radio that claim tax debts can simply be eliminated through filing for bankruptcy. Unfortunately, this is not always true.

Income tax debts are able to be discharged in Chapter 7 bankruptcy if all of the following is true:

All tax returns for the tax debt you’re seeking to discharged must have been filed at least two years before filing for bankruptcy.

The tax debt must have been due at least three years prior to filing your bankruptcy petition.

You must have filed a return for the tax at least two years prior to filing your bankruptcy petition.

The income tax debt has to have been assessed by the IRS a minimum of 240 days prior to filing your bankruptcy petition.

If a fraudulent tax return was filed or you attempted to evade paying the taxes by, for example, using a false Social Security number, bankruptcy won’t be able to eliminate this debt.

Certain events like a prior bankruptcy or an offer-in-compromise with the IRS can toll (stop) the running of these time periods. There are entire books written on how to interpret the rules for discharging a debt in bankruptcy. Be sure to obtain competent advice.

Unfortunately, even if you qualify to have your tax debt eliminated, your bankruptcy will not rid you of prior tax liens. If the IRS placed a lien on your property before bankruptcy was filed, the lien remains. This requires the debtor to satisfy the balance before they are able to sell the property. If the tax lien does not attach to any property, the IRS may abate (remove) the lien.

Tax Debt Relief

If you have an income tax debt, and are filing for bankruptcy, that may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code.

The difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy is that Chapter 7 allows for a full discharge of permitted debts while Chapter 13 issues a payment plan to repay some debts, with the rest of the permitted debts being discharged. Keep in mind, not all tax debts are able to be discharged in bankruptcy, but taxes that are eligible to be discharged in a Chapter 7 are also eligible for discharge in Chapter 13. When you file for bankruptcy, your tax debts must meet a certain standard in order to be discharged.

The criteria for income tax debt to be discharged are:

All tax debt must be from income taxes

The tax debt must be part of a tax return that was due at least three years prior to the taxpayer filing for bankruptcy. The due date includes any extensions.

The tax return has to have been filed at least two before the taxpayer files for bankruptcy. This date starts when the return was actually filed.

The tax assessment that the IRS sent you has to be at least 240 days old.

The tax return cannot be fraudulent.

The taxpayer cannot be guilty of tax evasion.

Some of the tax debt that is not dischargeable is for taxes for which no returns have been filed. While the IRS routinely assesses taxes on un-filed returns, these tax liabilities cannot be discharged until the taxpayer files a return for the year in question. The return must be filed by the taxpayer. A commissioner-filed return does not qualify.

If you file for Chapter 13 bankruptcy, money owed to the IRS that does not meet the qualifications to be discharged can be repaid through a payment plan that lasts anywhere between three and five years without penalties or continuing interest. (Although in some cases interest and penalties must be paid if there is a tax lien). One of the benefits of filing a Chapter 13 bankruptcy is if the IRS rejected your previous payment plan, this is a way to get them to accept one.

It is recommended that you speak with your attorney tax debt relief And bankruptcy before deciding between filing Chapter 7 or Chapter 13 to get rid of or aid with the burden of tax debt.

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